Federal Income Taxes I - Chapter 3

Info to study from chapter 3 of the Federal Income Taxes I course

present value

the concept that $1 today is worth more than $1 in the future

future value formula

Present Value × (1 + r)ⁿ

timing strategy

accelerate deductions during high-tax-rate years and income during low-tax-rate years

constructive receipt doctrine

a taxpayer must recognize income when it’s actually or constructively received; restricts income deferral for cash-method taxpayers

income shifting

exploits the differences in tax rates across taxpayers or jurisdictions; common strategy is to shift deductions from low tax rate taxpayers to high tax rate taxpayers OR shift income from a high tax rate jurisdiction to a low tax rate jurisdiction

related-person transactions

financial activities among family members, owners and their businesses, or businesses owned by the same owners

assignment of income doctrine

requires income to be taxed to the taxpayer who actually earns it

conversion strategy

recasting income and expenses to receive the most favorable tax treatment (i.e., employer providing tax free benefits to exployees instead of salary); implicit taxes can reduce or eliminate the advantages of this strategy

business purpose doctrine

allows the IRS to challenge and disallow business expenses for transactions with no underlying business motivation

step-transaction doctrine

allows the IRS to collapse a series of related transactions into one transaction to determine the tax consequences of the transaction

substance-over-form doctrine

allows the IRS to reclassify a transaction according to its substance

economic substance doctrine

requires transactions to have both an economic effect (aside from the tax effect) and a substantial purpose (aside from reduction of tax liability)

tax avoidance

the legal act of arranging your transactions to minimize taxes paid

arm’s-length transactions

transactions among unrelated taxpayers, where each transacting party negotiates for their own benefit

effective tax planning

maximizes the taxpayer’s after-tax wealth while achieving the taxpayer’s nontax goals